Ok, there are two different events with "Water" in them. "Water Level" and "Water Block". They are very different things.
Water Level creates a vast underwater area that spans the entire width of the level, as seen in Marinated Rabbit. It has two different settings: Instant and Height. Height is how many tiles away from the top of the level the top of the water should be. If Height is set to 0, the water will simply set itself to the height of the rabbit touching the event. Instant decrees how the water will get to that height. If 1, the amount of water in the level will instantly change to come up to that height. If 0, it will move slowly up or down to the new height, like in JJ1's Dreempipes or Lagunicus. The first time you hit a Water Level event, it must be Instant, or it will not work.
Water Block is used for small puddles, like in Colonius or Jungle. If you hit a water block event, a splash appears. Its parameter determines how far down from the top of the event the splash should appear, so it will conform more realistically to the visual tile-based top of the puddle.